Opinion

When to sue your financial advisor

Your best shot at recouping investment losses is to remain patient, resist the urge to sell at bottoms, buy more on dips and wait for markets to recover. Investors who have done so are gradually being made whole.

But it's possible your financial advisor or financial institution was so negligent that there are grounds for an investment loss recovery action.

Losses inflicted by markets usually can't be recouped by legal means. However, consultant and author Robert Goldin, president of Torontobased MacGold Direct Inc., lists 156 grounds for launching recovery actions, starting with lack of suitability of investments recommended.

Others posted at www.macgold.cainclude failure to update or conduct periodical reviews of the Know Your Client [KYC] form, lack of diversification to limit risk, failure to obtain written annual renewal of a discretionary account, failure to insure investments against losses, and failure to explain risks and dangers of investments recommended. "People don't realize how onerous are the obligations imposed on advisors," Goldin says. Aggrieved clients must show two things to recover losses. They must be able to prove that what the broker did was wrong, and that because of this action, damages were suffered.

When I circulated this to industry figures, I was surprised by the hostility directed at Goldin, the author of Investor Beware! and Insure Your Investments Against Losses. One consultant who educates financial advisors declined comment, saying Goldin was "attempting to benefit financially by trying to inflame investors' paranoia."

To which I might reply with the old saw "Just because you're paranoid doesn't mean they're not out to get you." The financial industry also tries to "benefit financially" from its customers, and as we've seen with the likes of Bernie Madoff and Earl Jones, not all are beyond reproach.

Fund analyst Dan Hallett says smaller investors may be discouraged from taking legal action unless their losses are significant ($100,000 or more). "Finding a way to help them seek indemnification would be a very positive development. I'm not sure if Mr. Goldin has the answer but something like this is needed."

Goldin charges $75 for an initial consultation, then $185/hour: less than what securities lawyers charge. His site says securities lawyers may charge $80,000 to $100,000 to take a loss recovery claim to court. But some may act on a contingency basis, while claims below $10,000 can go through small claims court or arbitration.

Goldin's site reminds investors that "besides your financial advisor being liable and responsible to you for all your investment losses, your brokerage house is also liable to you if they failed to properly monitor and supervise the activities of your financial advisor."

Thus, a firm may be culpable for failure to uncover an advisor's wrongful activities, such as churning an account, or failing to notice unsuitable investments in a portfolio: the brokerage also has a copy of the KYC form and should have instructed the advisor to jettison any questionable holdings.

Ellen Bessner, who recently joined Cassels Brock & Blackwell LLP as a litigation partner defending brokerages and advisors, has "mixed emotions" about Goldin's programs. "He's definitely providing ammunition for rogue clients." In her book, Advisor at Risk, Bessner describes how advisors can defend themselves against clients who are well aware of the risks they're taking but when their bets fail, feign ignorance in an attempt to game the system.

Bessner cites a 2008 ruling on Ron Parent, who knowingly made investments more aggressive than his KYC form indicated. Judge Thomas Lederer "still found the advisor knew the client and fulfilled his obligations."

Sometimes, as the judge noted of Parent, a client may be "the author of his own misfortune." But as Madoff et al remind us, this is not always so.